Framework for community groups outlined

The Government has explained for the first time who it thinks will want to set up community interest companies, the legal status to be introduced in July that is designed for social entrepreneurs.

In a guide issued by the Department of Trade and Industry, the Government states that community interest companies (CICs) will appeal to anyone looking to incorporate their business, enjoy limited liability status and make clear to customers, financial backers and members that they "will work for the benefit of the community rather than private gain".

The guide also states that by becoming a CIC, the entrepreneur can ensure that if the business ceased to trade its remaining assets "will be preserved for the community".

But the guide warns organisations operating as charities that CIC status may not be appropriate as, while CICs will be less heavily regulated, they will not receive the same tax breaks. "The benefits of lighter CIC regulation may well be outweighed by the tax benefits of being a charity," the guide states.

Launching the guide, the first in a series, industry and regions minister Jacqui Smith said: "Community interest companies will harness the entrepreneurial spirit of individuals for the benefit of their communities, creating new ways to provide goods, services and additional social benefits such as employment and training."

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Jonathan Bland, chief executive of the Social Enterprise Coalition, which helped the Government come up with the idea of CICs, said the guide would help entrepreneurs choose between the various legal forms available.

Research by Rebecca Harding, senior fellow at London Business School, has found that 6.6pc of the UK adult population of working age are involved in some form of activity that has social goals and that these organisations were "disproportionately" more effective at job creation.

To ensure that the CIC status is not abused, the companies must adopt a "suitable constitution" and satisfy, in the opinion of a newly created regulator, a community interest test.

CICs can be structured as either a private company limited by shares, limited by guarantee or public limited company. To help them raise external finance, CICs limited by shares will be able to issue shares that pay a dividend.

However, the dividend paid by CICs limited by shares will be capped to ensure it is not used as a back-door means of distributing profits and assets, in line with all other CICs.